Bashing the banks and blaming Wall Street for the financial crisis has practically become a new spectator sport. But it’s time Americans understood the role that finance and banking have played in the success of our nation’s economy over the past century. So says Steven M. Davidoff, a professor at the University of Connecticut School of Law, in a recent article in the New York Time’s blog, Dealbook.
Although he still shows the move Wall Street to his students for historical context, Davidoff argues that it’s time America realized the value of finance. Finance is the fuel that powers our factories, creates innovative companies such as Google and Apple, and ensures that infrastructure such as roads and bridges are built.
As for investment banking, today’s companies survive and thrive depending on whether they can obtain loans or persuade investment banks to underwrite the sale of their securities to third parties.
Even the rise of securitization and financial derivatives, Davidoff says, has allowed capital and risk to be managed more efficiently. Currency swaps, for example, allow companies to hedge currency risk when trading abroad. The notional value of such swaps has reached $414 trillion, according to the International Swaps and Derivatives Association.
Finance has also driven the export of American legal, accounting and consulting services. And since World War II, the private equity, venture capital and hedge fund industries have all found the center of their universe to be located right here in the United States.
This is a world that Main Street does not fully understand, Davidoff says. Thus, those of us both seeking and working in investment banking jobs will have to do a better job of illuminating the value of finance in society, while we participate in fixing what has gone wrong.
“There must be a firm embrace of the idea that finance’s rise is a good thing,” Davidoff writes. “Finance is an inevitable product of a $14 trillion economy and a modern society. We cannot simply turn off the cash machine.”